On Tuesday, Oil (CL) prices extended the latest bull run for a fourth consecutive day, with crude stretching above $73 per barrel. Oil prices had suffered through trading on Tuesday following the release of API inventories but reversed course after the Biden administration announced plans to replenish the strategic petroleum reserves (SPR) later this year. The announcement may have offered relief to traders worried about recessionary headwinds after Bank of America (BAC) had lowered its forecast for Brent Oil (EB) on curbing global demand earlier on Tuesday.
Oil’s Latest Moves
Tuesday's preliminary report by the American Petroleum Institute (API) showed a surprise build of about 3.6 million barrels in US inventories, much more than the expected drawdown of 900 thousand barrels.
Some analysts said it was a sign of weakening demand and compounded concerns in the face of lower crude imports and weaker export growth in China last April. Gasoline (RB) stockpiles also showed a surprise build of 390 thousand barrels compared to a drawdown of 1.2 million barrels expected. As a result, crude oil moved lower by $0.67 per barrel, or about 0.9%, through the early part of the day, while brent oil moved lower by $0.69 per barrel, or 0.9%. Both crude and brent had witnessed a 2.5% drop earlier in the session.
Later on Tuesday, crude oil reversed the entirety of that move and ended trading up by 0.8% in the aftermath of reports that the Biden administration planned to purchase oil to replace the SPR. For context, the US had canceled the mandated sale of 140 million barrels but now plans to purchase crude to replenish the four-decade-low reserves.
Brent crude settled up 0.6% at $77.44 per barrel, while WTI crude closed up 0.8% at $73.71 per barrel. In support, US Energy Secretary Jennifer Granholm was quoted saying that the government would start buying later this year. Earlier in March this year, she had stated that refilling the US SPR could be complicated.
Higher Demand, Lower Output
Furthermore, the US Energy Information Administration (EIA) issued its short-term report on Tuesday, in which it said it expects a seasonal rise in demand coupled with a drop in production that would "put some upward pressure on crude oil prices in the coming months." The report also cut its output estimate for US oil producers for this year and next. (Source:EIA)
Prices had been under pressure due to Chinese crude imports showing contraction in April, which fell to the lowest level since January due to a slower-than-anticipated reopening rebound. The drop represented 1.45% fewer imports than the prior year's month, totaling 10.3 million barrels per day.
It appears that slower economic activity had stalled demand for refined fuel as China's manufacturers worry about a potential global recession and a slowdown in the domestic property market. Moreover, sluggish economic activity led to a fall in refined fuel demand, particularly diesel, while exports of refined fuels dropped to their lowest monthly level since last July. Citi (Citigroup) analysts said that the current gasoline export margins were "not so attractive" to Chinese oil majors compared to less than $10 per barrel in key export market Singapore.
Major oil exporter Saudi Aramco reported a 19% drop in Q1 profits on Tuesday due to falling oil prices, while it still managed to beat estimates after reporting a net income of $31.9B compared to the $30.5B expected.
The company's CEO, Amin Nasser, remained bullish on oil, seeing it as essential for energy production for the foreseeable future and anticipated demand from China and India. However, he pointed out that the industry isn't investing enough to expand production to meet future demand. In his view, markets have overreacted to the regional bank issue in the US and tightened monetary policy concerns.
What to Keep an Eye On
OPEC, which is dominated by Saudi Arabia, cut production at the last meeting with the stated attention to providing market stability. OPEC and its allies will issue its monthly report on May 11, with experts pointing to the next face-to-face OPEC meeting in Vienna as a sign that the cartel will take a more active role in supporting the price of oil, implying more cuts to production. OPEC will also release an update on its demand and supply outlook.
Analysts are also focusing on how today’s CPI data could affect oil prices in light of the Fed dropping its guidance for more rate hikes as inflationary pressure is easing.
Oil prices increased in late trading on Tuesday following an announcement by the White House that it would start replenishing the SPR later in the year. The move was a reversal from earlier in the day when Chinese trade data and a surprise API build weakened the price. The EIA also reported that prices could rise in the short term as seasonal demand could be higher while output was expected to be lower. Traders may want to keep track of this week’s CPI report and weigh in the 4-days streak when trading.